The Great Transformation is a book by Karl Polanyi, a Hungarian political economist. First published in 1944 by Farrar & Rinehart, it deals with the social and political upheavals that took place in England during the rise of the market economy. Polanyi contends that the modern market economy and the modern nation-state should be understood not as discrete elements but as a single human invention, which he calls the "Market Society".

A distinguishing characteristic of the "Market Society" is that humanity's economic mentalities have been changed. Prior to this, people based their economies on reciprocity and redistribution across personal and communal relationships.Polanyi, The Great Transformation, ch. 4. As a consequence of industrialization and increasing state influence, competitive markets were created that undermined these previous social tendencies, replacing them with formal institutions that aimed to promote a self-regulating market economy. The expansion of capitalist institutions with an economically liberal mindset not only changed laws but also fundamentally altered humankind's economic relations; prior to this, markets played a very minor role in human affairs and were not even capable of setting prices because of their diminutive size.Polanyi, The Great Transformation, ch. 2,3. It was only after industrialization and the onset of greater state control over newly created market institutions that the myth of human nature's propensity toward rational free trade became widespread.Polanyi, The Great Transformation, ch. 3,4 & 15. However, Polanyi asserts instead that "man's economy, as a rule, is submerged in his social relationships,"Polanyi, The Great Transformation, p. 48. and he therefore proposes an alternative ethnographic economic approach called "substantivism", in opposition to "formalism", both terms coined by Polanyi in future work.

On a broader theoretical level, The Great Transformation argues that markets cannot solely be understood through economic theory. Rather, markets are embedded in social and political logics, which makes it necessary for economic analysts to take into account politics when trying to understand the economy. For this reason, The Great Transformation is a key work in the fields of political economy and international political economy.

History Polanyi began writing The Great Transformation in England in the late 1930s. He completed the book in the United States during World War II. He set out to explain the economic and social collapse of the 19th century, as well as the transformations that Polanyi had witnessed during the 20th century.

General argument Polanyi argued that the development of the modern state went hand in hand with the development of modern market economies and that these two changes were inextricably linked in history. Essential to the change from a premodern economy to a market economy was the altering of human economic mentalities away from their grounding in local social relationships and institutions, and into transactions idealized as "rational" and set apart from their previous social context. Prior to the Market Society, markets had a very limited role in society and were confined almost entirely to long-distance trade.Polanyi, The Great Transformation, p. 56. As Polanyi wrote, "the same bias which made Adam Smith's generation view primeval man as bent on barter and truck induced their successors to disavow all interest in early man, as he was now known not to have indulged in those laudable passions."Polanyi, The Great Transformation, p. 45.

The modern market economy was forced by the powerful modern state, which was needed to push changes in social structure, and in what aspects of human nature were amplified and encouraged, which allowed for a competitive capitalist economy to emerge. For Polanyi, these changes implied the destruction of the basic social order that had reigned throughout pre-modern history. Central to the change was that factors of production, such as land and labor, would now be sold on the market at market-determined prices instead of allocated according to tradition, redistribution, or reciprocity.Polanyi, The Great Transformation, p. 41. This was both a change of human institutions and human nature.

His empirical case in large part relied upon analysis of the Speenhamland laws, which he saw not only as the last attempt of the squirearchy to preserve the traditional system of production and social order but also a self-defensive measure on the part of society that mitigated the disruption of the most violent period of economic change. Polanyi also remarks that the pre-modern economies of China, the Incan Empire, the Indian Empires, Babylon, Greece, and the various kingdoms of Africa operated on principles of reciprocity and redistribution with a very limited role for markets, especially in settling prices or allocating the factors of production.Polanyi, The Great Transformation, pp. 52-53. The book also presented his belief that market society is unsustainable because it is fatally destructive to human nature and the natural contexts it inhabits.

Polanyi attempted to turn the tables on the orthodox liberal account of the rise of capitalism by arguing that "laissez-faire was planned", whereas social protectionism was a spontaneous reaction to the social dislocation imposed by an unrestrained free market. He argues that the construction of a "self-regulating" market necessitates the separation of society into economic and political realms. Polanyi does not deny that the self-regulating market has brought "unheard of material wealth", but he suggests that this is too narrow a focus. The market, once it considers land, labor and money as fictitious commodities, and including them "means to subordinate the substance of society itself to the laws of the market."Polanyi, The Great Transformation, p. 71 (see also the entirety of Chapter 6).

This, he argues, results in massive social dislocation, and spontaneous moves by society to protect itself. In effect, Polanyi argues that once the free market attempts to separate itself from the fabric of society, social protectionism is society's natural response, which he calls the "double movement." Polanyi did not see economics as a subject closed off from other fields of enquiry, indeed he saw economic and social problems as inherently linked. He ended his work with a prediction of a socialist society, noting, "after a century of blind 'improvement', man is restoring his 'habitation.'"Polanyi, The Great Transformation, p. 257.

Gold standard According to James Ashley Morrison, Polanyi offers a prominent argument in the field of political economy for Britain's decision to depart from the gold standard. Polanyi argues that Britain went off the gold standard due to both deteriorating international economic conditions and pressures from labor, which had grown stronger over time. In 1931, the Labour Party found itself faced with a dire dilemma: either reduce social services or let currency exchange rates collapse. Since it could not decide on one alternative or the other, there was a government crisis, and the "traditional parties" decided both to cut social services and to abolish the gold standard.Polanyi The Great Transformation, p. 236. Labor opposed the gold standard because maintaining it meant that the British government had to implement austerity. James Ashley Morrison found many later explanations for the collapse of the gold standard very much resemble the Polanyian argument, which he summarized as follows:

Developments in the global economy, particularly after World War I, made maintaining the gold standard increasingly painful. Diminished international cooperation combined with Britain’s relative economic decline to exacerbate its difficulties. At the same time, a newly empowered working class harnessed evolving “social purpose” to resist the austerity necessary to defend gold.

Before the market society

Based on Bronislaw Malinowski's ethnological work on the Kula ring exchange in the Trobriand Islands, Polanyi makes the distinction between markets as an auxiliary tool for ease of exchange of goods and market societies. Market societies are those where markets are the paramount institution for the exchange of goods through price mechanisms. Polanyi argues that there are three general types of economic systems that existed before the rise of a market society: reciprocity, redistribution, and householding:Polanyi The Great Transformation, pp. 49–50.

Reciprocity: exchange of goods is based on reciprocal exchanges between social entities. On a macro level, this would include the production of goods to gift to other groups. Redistribution: trade and production is focused to a central entity such as a tribal leader or feudal lord and then redistributed to members of their society. Householding: economies where production is centered on individual households. Family units produce food, textile goods, and tools for their own use and consumption.

These three forms were not mutually exclusive, nor were they mutually exclusive of markets for the exchange of goods. The main distinction is that these three forms of economic organization were based around the social aspects of the society they operated in and were explicitly tied to those social relationships. Polanyi argued that these economic forms depended on the social principles of symmetry, centricity, and autarchy (self-sufficiency). Markets existed as an auxiliary avenue for the exchange of goods that were otherwise not obtainable.Polanyi The Great Transformation, pp. 51–52.

Reception

Following its publication in 1944, The Great Transformation occupied a marginal position in the social sciences for decades. The polarized intellectual climate of the Cold War, which framed economic debate as a choice between capitalism and socialism, left little space for Polanyi's institutional analysis.Block, F.(2003). "Karl Polanyi and the Writing of The Great Transformation." "Theory and Society",32(3),275-306. The book's readership began to expand in the 1980s, when the rise of neoliberal globalization closely recalled the nineteenth-century market liberalism Polanyi had critiqued. Sociologist Mark Granovetter's influential 1985 article on "embeddedness" drew on Polanyi's framework and helped establish the concept as foundational to the field of economic sociology.Hodgson, G.M. (2017). "Karl Polanyi on Economy and Society: A Critical Analysis of Core Concepts." "Review of Social Economy",75(1),1-25. According to Google data, citations of "Karl Polanyi" grew rapidly from the early 1980s onward, a pace that accelerated further in the 2010s.Dale, G. (2024, June 26). "The Great Transformation by Karl Polanyi is a classic critique of capitalism - but it wasn't an overnight success." "The Conversation".

The book has influenced scholars such as Marshall Sahlins, Immanuel Wallerstein, James C. Scott, E.P. Thompson, and Douglass North. John Ruggie, who called the Great Transformation a "magisterial work", was influenced by the work in coining the term Embedded liberalism for the Bretton Woods system of the post-World War II period.

The sociologists Fred L. Block and Margaret Somers argue that Polanyi's analysis could help explain why the resurgence of free market ideas has resulted in "such manifest failures as persistent unemployment, widening inequality, and the severe financial crises that have stressed Western economies over the past forty years." They suggest that "the ideology that free markets can replace government is just as utopian and dangerous" as the idea that Communism will result in the withering away of the state.Fred Block and Margaret R. Somers. The Power of Market Fundamentalism: Karl Polanyi's Critique. Harvard University Press, 2014.